Heterotic/type I duality, D-instantons and an N=2 AdS/CFT correspondence

D-instanton effects are studied for the IIB orientifold T^2/I\Omega(-1)^{F_L} of Sen using type I/heterotic duality. An exact one loop threshold calculation of t_8 \tr F^4 and t_8(\tr F^2)^2 terms for the heterotic string on T^2 with Wilson lines breaking SO(32) to SO(8)^4 is related to D-instanton induced terms in the worldvolume of D7 branes in the orientifold. Introducing D3 branes and using the AdS/CFT correspondence in this case, these terms are used to calculate Yang-Mills instanton contributions to four point functions of the large N_c limit of N=2 USp(2N_c) SYM with four fundamental and one antisymmetric tensor hypermultiplets.